The IRS has just released a private letter ruling (PLR 202434006) involving a new employee choice design that allows eligible employees to make an annual election before the start of each year to direct employer funds (i.e., the employer contribution) to be dispersed in one of the following ways:
Employees would not have the right to receive the employer funds in cash or as any other taxable benefit.
In recent years, employers have been interested in allowing more choice and flexibility in their benefit programs to better meet employees’ diverse financial needs and preferences — particularly with respect to student loan debt and unexpected medical expenses — but the legal, compliance, tax and administrative challenges associated with employee choice programs have been difficult to overcome.
The IRS’s approval of this new flexible choice design, which empowers employees to decide how to invest the employer contribution between saving for retirement, paying down student loans or saving for healthcare expenses, is a significant step forward.
Note that a PLR can only be relied on by the taxpayer that requested it. Employers interested in pursuing a similar choice program should consider seeking their own PLR.
With respect to the DC plan, the IRS ruled that because employees were not permitted to receive cash or a taxable benefit, the amounts elected by an employee to go into the DC plan would not be treated as elective deferrals, i.e., the choice would not be a “cash or deferred election” and would not be subject to the Internal Revenue Code (IRC) section 402(g) limit.
With respect to the retiree HRA, the IRS ruled that because employees were not permitted to receive cash or a taxable benefit and the employer contribution is not made pursuant to a salary reduction election (as required under HRA rules), and because the other requirements that apply to HRAs are satisfied, the choice program would not affect the treatment of contributions to and payments made from the retiree HRA for qualified medical expenses as amounts excludable from the gross income.
With respect to the HSA, the IRS ruled allocation of the employer contribution to an employee's HSA is excludable from the gross income of the employee, provided that 1) only HSA-eligible employees may elect to allocate the employer contribution to an HSA and 2) the applicable HSA contribution limits are not exceeded.
With respect to the educational assistance program, the IRS ruled that because employees do not have a choice between educational assistance and other remuneration includible in the employee’s gross income (which is a requirement under IRC section 127), the choice program will not affect the tax-free treatment of payments made under the educational assistance program. The IRS also ruled that an employee’s ability to allocate the employer contribution between different benefit programs would not prevent the educational assistance program from qualifying under IRC section 127.
Note that nontaxable SLRs under IRC section 127 are currently available only through 2025, unless extended by Congress. A bipartisan, bicameral bill to extend the tax-free student loan repayment benefit permanently under IRC section 127 was recently introduced. Although we don’t expect to see the bill move forward this year, its introduction shows that the issue is on Congress’ radar and helps set the stage for the issue to be included in next year’s tax discussions.
WTW served as a strategic advisor to the company that requested the groundbreaking IRS ruling and assisted with developing the plan design, aligning the plan’s options with its employees’ needs and addressing the regulatory requirements.
